Norway spending to rise, making higher rates more likely

OSLO (Reuters) - Norway will spend more than originally planned from its sovereign wealth fund in 2019, the government said in a revised fiscal budget on Tuesday, raising the likelihood the central bank will raise interest rates faster.

The Norwegian economy is on track to grow at its fastest pace in seven years, and Norges Bank said last week it plans to tighten monetary policy in June.

Cash spending from the fund — the world’s largest of its kind, with assets of more than $1 trillion — is now expected to reach 238.1 billion Norwegian crowns (21.07 billion pounds) this year, more than the 231.1 billion originally planned last October.

The revised fiscal spending plan should help the economy, increase growth about 0.5 percentage point, according to the Finance Ministry’s calculation. The initial plan was neutral, neither helping nor hurting the economy.

The increase in the so-called budget impulse is mostly caused by a downward revision of 2018 spending, however, and taken together the effect of the budgets for 2018 and 2019 will be largely neutral, the government said.

Even sp, the budget still points to higher interest rates, DNB Markets said.

“An expansionary fiscal budget in a situation with full capacity utilisation is an argument for Norges Bank to hike policy rates in June and increases the risk for another hike in September,” DNB said in a note to clients. “The proposal in the revised budget is more expansionary than expected.”

Lifted by a weak currency and strong demand from a boom in offshore oil and gas investments, the country’s mainland economy is expected to grow 2.7% this year, up from 2.2% last year, and in line with a forecast first made last October.

It will be the most rapid expansion Norway has seen since 2012, Statistics Norway data shows.

In 2020, the mainland economy is now expected to grow by 2.5%, less than the 2.8% seen in October.

Finance Norway, a lobby group representing banks and insurers, called for a “more responsible spending plan”.

“When the economy performs well, they should take the opportunity to hold back on oil revenue spending, not increase it,” Chief Executive Idar Kreutzer said in a statement.